Two districts ban costly bonds

40 to go, says county treasurer

San Diego County Treasurer-Tax Collector Dan McAllister has been trying to get school districts to swear off costly capital-appreciation bonds, and he has had two successes.

McAllister’s quest began last year after a Michigan blogger revealed that the Poway Unified School District approved a $105 million bond that will end up costing taxpayers $981.6 million by the time it is paid off in 2051.

The long-term bonds allow districts to make no payments for years or decades while interest costs escalate, pushing large payments on the debt down the road.

McAllister has been making his way through the county’s 42 school districts seeking policies against such borrowing. So far, La Mesa-Spring Valley and Del Mar have passed such a ban. Neither of those districts have passed such bonds, according to a Los Angeles Times database of 600 such borrowings in California since 2007.

La Mesa-Spring Valley board member Bill Baber said the process districts use to approve bonds is flawed, because bond consultants’ financial incentives may not encourage them to act in the interest of taxpayers and the bond deals are often rushed without being fully analyzed by the public.

La Mesa-Spring Valley’s new policy requires more oversight from the public, McAllister’s office or the County Superintendent of Schools on the district’s bond deals, prevents the district from proposing any bonds that will cost more than four times the amount borrowed, mandates the board be presented alternative financing options, and forces the district to justify any bond with a term greater than 25 years.

Baber said the policy was necessary to fix the flaws in the process.

“It’s like picking a credit card. You want to make sure you have the best interest rate, the best payment for your financial situation,” Baber said. “Just as credit cards can be abused by careless people, bond financing can be abused by school boards.”

Representatives of districts that have not passed such a capital bond policy say they are reluctant to give up their financing powers, and note that state legislation also supported by McAllister may soon make any local policy redundant.

McAllister said now is the time to stop the abuse of capital-appreciation bonds, some of which will end up costing taxpayers seven, 10 or even 16 times the amount borrowed. The bonds allow districts to keep tax rates low — for now — by putting off payments for years.

“If all the districts were to adopt these policies on their own, we wouldn’t need state legislation,” McAllister said. “We are calling upon districts to give this consideration, because we think it is in their best, long-term interest to do so. It gives a strong message to the taxpayers that they do listen and they are paying attention and they do want to do what’s right.”

School districts mainly use capital bonds to fund large building projects, and differ from more traditional deals that require annual payments and usually have much shorter terms. The balloon payments made just years before the sometimes 40-year capital bonds mature come long after the officials who approved them have moved on. Many capital bonds cannot be refinanced or prepaid, including Poway’s deal.

McAllister wants districts to limit the length of capital bonds to 25 years instead of 40, cap interest rates at 8 percent instead of 12 percent and ensure all the bonds can be refinanced. He also wants at least one other government board to sign off on bond deals and wants repayment costs limited to no more than four times the amount borrowed unless the county superintendent of schools approves a waiver.

Legislation being drafted by San Diego Democratic State Assemblyman Ben Hueso would impose rules similar to those suggested by McAllister if passed. On Thursday, the state treasurer and state superintendent of schools asked districts across the state to hold off on such financing pending legislative action.

The bill is a sticking point for the Lemon Grove School District, according to Gina Potter, its assistant superintendent for business. McAllister made his presentation to Lemon Grove last year.

“The district was undecided in great part because of the fact that it appeared as though the Assembly and Senate were looking at establishing their own policy surrounding capital appreciation bonds,” Potter said. “The district is interested in knowing how those policies will land.”

Potter said the district does want to ensure taxpayer dollars are spent prudently. Its 2010 bond deal included $3.1 million in capital bonds that will cost Lemon Grove $28.3 million when fully paid off in 2050, giving it one of the highest repayments costs of any deal approved in the county since 2007, according to the Los Angeles Times data.

McAllister said districts should be interested in passing a policy as soon as possible, and not waiting for Sacramento to get around to discussing a new law.

“We all know that the state legislature works in mysterious ways, and it takes a long time to ramp up successful legislation,” McAllister said. “Our hope is that school districts would come out swinging at the first of this new year.”

While the San Diego Unified School District has not passed an overarching capital bond policy, it did ban the use of capital bonds under its Proposition Z bond program before it was approved by voters last year. McAllister has presented to the district, and said they are considering a broader policy.

San Diego Unified board member Scott Barnett felt the Proposition Z ban was unnecessary, because the proposition’s bonds are funded through dedicated tax revenues and therefore should not require capital bond financing. Barnett told The Watchdog he is not in favor of restricting the district’s financing options, and noted the district may look at capital bonds for its older, Proposition S program in the future.

“That is what we need to do, is see what staff says, what types of CABs they will be, whether they are callable and what the interest rates are instead of some blanket policy, which I would not support,” Barnett said.